trendy retailers and designers such as Gap, J. Crew, Diane Von Furstenberg and Ralph Lauren. During these trips, Johnson hatched an idea to make Penney stores appealing not only to its core of middleincome shoppers, but also to new groups of younger and higher-income customers. Johnson decided to focus on three areas: price, merchandise and the stores. Johnson started as Penney’s CEO in November 2011. In his first couple of months in the role, he hired big-name executives whom he trusted. Among them, Michael Francis, a top Target executive whom he’d met while he worked there, was brought in as president to help redefine Penney’s brand. Johnson’s boldest move came on Feb. 1 when he rolled out new pricing in Penney’s 1,100 stores. That’s virtually unheard of in retail, where significant changes are typically tested in a few locations for several months before being rolled out nationally. Johnson says that Penney didn’t have several months to waste. Testing would’ve been “impossible,” he says, because Penney needed quick results. Johnson’s plan was designed to wean customers off the markdowns they’d become accustomed to, but that eat into profits. He ditched the nearly 600 sales Penney offered throughout the year for a three-tiered strategy that permanently lowered prices on all items in the store by 40 percent, and offered monthlong sales on select items and periodic clear-
ance events throughout the year. Penney, based in Plano, Texas, also stopped giving out coupons and banished the words “sale” and “clearance” in its new “fair and square” advertising campaign. The ads were colorful and whimsical: In one spot, a dog jumped through a hula hoop that a little girl held. The text read: “No more jumping through hoops. No coupon clipping. No door busting. Just great prices from the start.”
Teaching shoppers
Johnson’s plan received a warm reception at first. Investors began pushing Penney’s stock up after he announced the plan. It rose nearly 25 percent to peak at $43 in the days after the plan was rolled out in February. Analysts used words like “visionary”
and “revolutionary” to describe the plan. The honeymoon didn’t last. After most of Penney’s coupons and sales disappeared, so did its customers. And the ads didn’t help: They were praised for being entertaining, but criticized for not explaining the new pricing. Walter Loeb, a New York-based retail consultant, says Johnson acted in haste and sprang the changes on customers too soon. “The customer isn’t accustomed to such drastic change,” he says. The first sign that things were falling apart came in May when rival Macy’s Inc. told analysts that sales were rising at its stores that share malls with Penney locations. A week later, Penney posted a $163 million quarterly loss. Revenue plunged 20 percent to $3.15
billion. The number of customers visiting stores fell 10 percent. Wall Street didn’t like the changes any more than Main Street did. A day after it posted the loss, Penney’s stock fell nearly 20 percent — its biggest one-day decline in four decades — to $26.75. That same month, Standard & Poor’s Ratings Services lowered its credit rating to junk status. Johnson asked investors to be patient and reiterated his confidence in his plan. But a few weeks later, he fired Francis, who’d been in charge of marketing the new pricing. Johnson, who wakes up at 4 a.m. without an alarm clock, took over that responsibility and brought back the word “sale” in ads. But things kept getting worse. So six months after he rolled out Penney’s plan, Johnson tweaked pricing. On Aug. 1 — just days before Penney posted another big loss on a second consecutive quarter of disappointing revenue — Johnson eliminated one tier of the pricing plan: the monthlong sales. He also brought back another taboo word: clearance. Johnson says the original three-tier strategy was too confusing for customers. “We got too tricky,” he said. He also vowed to better communicate Penney’s pricing to shoppers. As part of that, Penney rolled out ads that were in stark contrast to the spots it used to introduce the plan. For instance, a TV spot touted free haircuts for students during the back-to-school see jcp on page 16
From 1 store to 1,100 A look at J.C. Penney’s milestones: 1902: James Cash Penney, son of a Baptist preacher and farmer, opens The Golden Rule, a dry goods and clothing store in Kemmerer, Wyo. The name was based on his guiding principle of building a business through serving the community with fair dealing and honest value. 1913: Incorporated in Utah as the J.C. Penney Co. Inc., and the Golden Rule name was phased out. 1914: Headquarters moves from Salt Lake City to New York City. 1929: Begins selling shares as a publicly traded company.
1951: Store sales exceed $1 billion for the first time.
2009: Opens its first store in Manhattan.
1971: James Cash Penney dies at age 95.
2010: Becomes the exclusive retailer of Liz Claiborne and Claiborne in the U.S. and Puerto Rico. Exits catalog business. Introduces mobile coupons.
1979: Catalog sales pass $1 billion for the first time.
2011: Ron Johnson, a former Apple executive, becomes CEO.
1992: Headquarters moves to Plano, Texas.
2012: Implements a new pricing strategy that eliminates hundreds of coupons and sales in favor of everyday lower prices. Begins rolling out new shops in stores to turn the stores into mini-malls of sorts.
1963: Issues its first catalog.
1994: Launches jcpenney.com, its online store. 2005: Penney’s e-commerce business surpasses $1 billion in sales.
— Associated Press
January 2013 The Business Connection 15